INVESTING BASICS

Saving and investing are the two basic pillars of sound financial health. When you invest your money in the right place you give it the power to grow and multiply. This section takes you through the basics of investment so you can live a financially worry-free life and meet your financial goals.

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Saving money means keeping aside a part of your income regularly in order to deal with unexpected future expenses.

The only thing certain in life is uncertainty. Today you may be earning well, meeting all your expenses and leading a happy life. But what if suddenly something happens and you lose your job? Or maybe a sudden need for money arises for something unexpected.

For these uncertainties, you need a 'rainy day' fund, which can be built only if you start saving. Typically a 'rainy day' fund contains three to four months of living expenses in case you lose your job or meet with an unexpected need for the extra cash. So the next question is, where to keep this fund? Stash your savings in an account that you can access quickly and easily; where there is virtually no risk of losing your money; and where the monstrous inflation doesn't eat up your money. Here are a few options where you can stash your savings:

Let's put it very simply, investing is putting your money to work for you.

In our lives we are generally engaged in working for our job or setting up some business to make our ends meet. But there's a limit to how much we can work and earn out of it. In addition, the escalating inflation rate adds up to our woes. Hence, we spend half of our lives earning money when we actually end up having no leisure time to enjoy it.

Since you cannot create a duplicate of yourself to increase your working time, you need to have an extension of yourself, i.e. your money to work on your behalf. That way, while you are putting in hours for your employer, sleeping, reading the paper, or socializing with friends, you can also be earning money elsewhere.

Quite simply, making your money work for you maximizes your earning potential whether or not you receive a promotion or increment in your salary, decide to work overtime, or look for a higher-paying job.

While the saver is interested in protecting his or her assets (money), the investor's goal is to grow or increase the initial amount of money being invested. Following explains the difference between the two:

Saving

Investing

Focus

Focus on safety of capital.

Focus on growing or increasing the initial amount of money, i.e. returns

We all have dreams and aspirations to fulfill and just one life to achieve all this. Today we have a good job, a fat paycheck, but what if things take a downturn or if there is an eventuality?

It is thus important that we plan our investments to make our money work harder for us, so that we can achieve our dreams and meet our financial goals, beat inflation, be prepared for any situation in life and also have enough funds to have a good life even after retirement.

For an average person, investing is the only way they can retire and yet maintain their present standard of living. By planning well in advance you can ensure financial stability of your retirement.

Moreover, investing let's you take advantage of miracle of compounding - Compounding is the fact that the returns that you generate from your investment can be reinvested to make even more money than your initial investment. The money you make goes back to work to make you even more money than before. See put time on your side for benefit of compounding

It is important that you start saving early and consistently so that you can reach your financial goals. The sooner you start saving, the more options you'll create for yourself later in life. When you start to save early, you accumulate more than someone who starts later but makes larger contributions than you because of the magical compounding effect.

You want to know how? Consider the following example:

Risha

Rahul

INVESTMENT per month

2,000

3,000

Starts at the age of

22 years

30 years

Earning returns @ (p.a.)

12

12

Total Investment (in Rs)

6,72,000

7,20,000

Redemption at the age of 50 (in Rs)

55,17,169

29,97,443

INVESTMENT MYTHS

Stay away from equity it is very risky and is meant for only wealthy people or those who like to speculate.

Debt is safe. The best place to invest money is debt and gold.

Insurance is an investment

Contact our advisor to help you to clear these common myths and help you with your investments.

Thus, the longer you stay invested the more money you will make. The best way to take the benefit of compounding is to start saving and investing wisely as early as possible. The earlier you start investing, the greater will be the power of compounding.

Once you have made the decision to invest your money the next thing that will come to your mind is where to invest? It's important to understand your options as well as the risks associated with each of them. Here are the key investment avenues:

The following table gives a brief comparison of various investment choices on risk-return parameter:

How much risk am I comfortable with - conservative, moderate, aggressive?

How soon do I plan on using the invested funds?

By asking yourself these simple questions you'll be able to start narrowing down all of the available choices and select the one that will help you pursue your goals. This exercise is called asset allocation and portfolio diversification.

Once you have done self-assessment, the next step would be to identify in which asset classes you should invest in. This is where asset allocation becomes important. Asset allocation means distributing your money across various investment avenues or assets (such as equity, bonds and cash) so that the poor performance of any one avenue/asset does not jeopardise the entire investment plan. The goal is to help reduce risk and enhance returns and your money is poised to take advantage of the 'booming' sectors, while protecting you from heavy losses.

The advantage of having different assets in the portfolio is that a decline in any one asset can be partially offset with the presence of other assets, which are not witnessing the same trend (in this case a decline). The reason why having more than one asset can work in your favour over the long-term is because different assets react differently to the same set of factors. For instance, inflation which can be a negative for stocks in the short-term, could actually lead to a rise in gold prices. So if your portfolio is well-diversified, then an unfavourable situation in a particular asset class will be combated by the other.

Generally, a larger portion of your portfolio should be dedicated to:

Stocks, if...

You have a relatively long investment time frame - 5 to 10 years or longer, and

You want the potential to make substantial returns on your investments to reach your goals, and

You have the risk tolerance to withstand significant market volatility.

Bonds, if...

Your goal is to preserve your assets.

You have a mid- to long-term investment timeframe.

You can withstand some fluctuation in asset values on the way to achieving your goals.

You need an income stream from your investments.

Cash equivalents, if...

You may need to access a significant portion of your money in the near term (0-6 months).

Your have invested your emergency fund savings for easy access.

You are risk averse.

Are Asset Allocation and Diversification Different?

Asset Allocation is the process of dividing your money in different asset classes like property, shares, bonds, gold and cash, while Diversification is the process of dividing your money within the asset class like buying shares of banking, telecom and FMCG sector in the equity allocation of your portfolio or buying property in Mumbai, Gurgaon and Singapore in the property allocation. Both the strategies help in reducing your investment risk.

Once you have allotted your money to different asset classes for investment, it is important that you also diversify within each asset class. The next step would be to spread your money over various investment options within a particular asset class. The old adage holds trueâ€”don't put all your eggs in one basket.

Choose shares or equity mutual funds that represent a greater variety of industries and companies. For example, suppose you are an aggressive investor with total investments across asset classes totaling Rs 5 lacs and you decide to invest 70% of your portfolio in equities. Now the Rs 3.5 lacs that you are investing in equities should be divided among different segments of the equity market, ranging from large companies to small companies or domestic to international and also in companies belonging to different industries like automotive, FMCG, financial services, IT, etc.

Tip: Keep in mind, however, that all investments involve some risk. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Remember that diversification cannot eliminate the risk of fluctuating prices and uncertain returns.

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